Cablegate: Thai Telecom Sector Reform:Prospects For

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A

REF: A. A. 01 BANGKOK 5186
B. B. 04 BANGKOK 2189
C. C. 05 BANGKOK 6901
D. D. 05 BANGKOK 6761

1. (U) SUMMARY: Royal Thai Government (RTG) plans to
privatize the telecom operators TOT PCL (TOT) and CAT Telecom
PCL (CAT) are finally moving forward. Several practical
problems require resolution, however, before either
enterprise will be able to effect an initial public offering
(IPO) of shares, now scheduled for 2006. Specifically, only
with greater clarity on the outcome of legal disputes with
private operators and the costs associated with the emerging
regulatory regime will investors be able to determine the
value of either entity. While the RTG appears serious in its
attempt to partially privatize both entities in some form,
the risk of failure is substantial, particularly for CAT.
The November 2005 IPO of the state-owned electric power
producer EGAT may affect the immediate prospects for both TOT
and CAT. Since neither TOT nor CAT has demonstrated that it
has a viable business model for operating in the increasingly
competitive telecommunications sector, however, either or
both entities will likely combine in some manner with one or
more other players as the sector consolidates. END SUMMARY

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2. (U) Initially approved in 1997, the RTG,s
Telecommunications Master Plan calls for privatization of its
two state-owned enterprises (SOEs) TOT and CAT as part of a
broad policy of liberalizing the sector as set out in REF A.
Privatizing TOT and CAT is also consistent with the RTG's
plans for SOE reform. As a precursor to privatization, TOT
was corporatized in July 2002; that is, shares still owned by
the RTG were issued. Effective August 14, 2003 the
Communications Authority of Thailand was corporatized into
two separate entitites: CAT Telecom PCL and Thailand Post
Company Limited (REF B).

3. (U) Deadlines for privatization of TOT and CAT have come
and gone for many reasons, the most basic being the absence
of an independent regulator for the industry. Only with the
formation of the National Telecommunications Commission in
November 2004 has the framework within which privatization
can realistically occur begun to emerge.

4. (U) Notwithstanding the failure of the RTG to privatize
TOT and CAT, Thailand,s telecom sector has substantially
liberalized. Private operators have long been permitted to
enter the fixed-line and mobile services markets by way of
concession agreements. TOT and CAT have concluded more than
thirty build-transfer-operate (BTO) concession agreements,
whereby private companies build telecom networks and transfer
the assets to the SOE, which then offers long-term
concessions to the private operators (or concessionaires) in
exchange for a share of the revenues going forward. The
legacy of this liberalization without privatization is that
the Thailand,s telecommunications sector is relatively
competitive, particularly in the market for mobile services
as set out in REF C.

5. (U) The BTO concessions, detailed in septel, have
distorted the Thai telecom market. In effect, TOT and CAT
have served as both operators and regulators. The terms of
the concessions have been more favorable to some
concessionaires (such as AIS) over others (such as TAC). The
concessions have also served to sustain both SOEs by
guaranteeing flows of revenue that constitute rents pure and
simple. For this reason, reformers have called for
conversion of the concessions to licenses in order to create
a level playing field that fosters free and fair competition.

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6. (U) The NTC celebrated its one-year anniversary on
November 1, 2005. As set out in REF D/septel, the regulator
has made substantial progress toward establishing its
position as the industry regulator and moving forward with
the decisions required to define the new regulatory
environment. The most significant of these was the decision
to issue new licenses rather than to force concession
conversion directly. In order to avoid the legal challenge
that would certainly have resulted from any direct attempt to
intervene in the relations between the SOEs and their
concessionaires, the Commissioners chose to issue new
licenses to the SOEs and private operators alike, thereby
clearly establishing the NTC,s authority over their
operations. Additionally, licenses about to be issued for
third-generation (3G) services will provide an incentive for
private operators to migrate their subscribers from the
current second-generation (2G) services regulated by the
concessions with their heavy revenue-sharing payments to 3G
services regulated by the NTC and requiring payment of less
burdensome license fees to the NTC. Such migration will thus
unwind the concessions over a multi-year period. The obvious
downside for potential investors, however, is that both TOT
and CAT stand to lose their rent revenue in about five years.
(Note: most of the concessions currently in effect end
2015-2017. End note.)


7. (U) TOT has fixed its IPO date for May 11, 2006, but many
such dates have come and gone before. The prospects for a
November 2005 IPO faded when the Ministry of Information and
Communication Technology rejected TOT's business plan as
&unrealistic.8 The plan,s projected revenues from
non-voice services, which require a large capital investment
for 3G services, was overly optimistic, according to MICT.

8. (U) TOT has nevertheless taken concrete steps in
preparation for the IPO. It has retained Phatra Securities
and Credit Suisse as underwriters, and reportedly seeks to
float 180 million out of its total 600 million shares. TOT's
auditor-general is finishing an audit of the enterprises's
finances by February, at which point the investor road show
and IPO process is expected to begin. One incentive for
listing in 2006 is a tax break due to expire this year that
gives newly listed companies on the Stock Exchange of
Thailand the right to use a tax rate of 25 percent tax rather
than the normal rate of 30 percent.

9. (U) TOT is also working to resolve the issues that
complicate efforts to value the company, namely its disputes
with True Corp, a concessionaire, over license fees, with the
NTC over license fees, and with the Ministry of Finance (MOF)
over exemption from excise taxes. At stake in the dispute
with True Corp are lawsuits for damages of several billion
baht against TOT over access fees charged. With the MOF, the
issue is whether TOT may continue to enjoy the exemption from
excise taxes that it enjoyed when it was an SOE (before
becoming an NTC license holder).

10. (U) CAT faces a much rockier road to a successful IPO.
No date has been set, and, owing to serious doubts about the
value of its business going forward, the SOE appears to be
having difficulty finding underwriters. Thus far, CAT has
retained Finansa and Kim Eng Securities. A leading Thai
securities firm that has underwritten other IPOs of SOEs has
privately confirmed that it passed on the opportunity to
underwrite CAT's IPO. CAT's relatively disadvantageous
position vis-a-vis its concessionaires under the NTC's
licensing fee regime as noted in paragraph no. 13 below adds
to the uncertainty.


11. (U) Regulatory uncertainty has, from the beginning, been
at the heart of the problem of valuing the state-owned
telcos. The issuance of Type III licenses (for operators
with network providing public telecommunications services) to
TOT and CAT on August 4, 2005 marks the emergence of a new
regulatory regime going forward. Several issues affecting
the revenue and profitability of the two SOEs nevertheless
remain outstanding. These include the unwinding of the
concessions, interconnection charges, license fees, and
universal service obligation (USO) fees.

12. (U) TOT's dispute with the NTC over licensing and other
fees illustrate the extent of the problem. With the issuance
of the August 4 licenses, TOT became liable for regulatory
fees. According to TOT, these fees will total five billion
baht per year. They include a fixed USO fee of 4 percent of
the company's operating revenue (2.5 billion baht), a license
fee of 3 percent of revenue (1.9 billion baht), 12 baht per
subscriber telephone number per year (490 million baht), and
a spectrum fee still to be determined. TOT has asked the NTC
to reduce the fees to one billion baht, but the NTC insists
that the charges are fair. TOT is seeking especially to
secure a waiver of the USO fee. It argues that as a state
agency, it has spent tens of billions of baht over the years
to build out the network and to extend it even to areas that
private operators would deem uneconomical.

13. (U) CAT's problem with licensing fees is inseparable
from its concessions with private operators, namely, TAC, TA
Orange, and DPC (a subsidiary of market leader Advanced Info
Service (AIS)). The fees are the same as those listed in
paragraph 12, plus an interconnection rate set at 1.07 baht
per minute. CAT executives claim that, just the burden of
one operator, TA Orange, will place CAT in the red by almost
three billion baht per year. CAT seeks accordingly to scrap
the agreements. Having paid the burdensome revenue sharing
obligations under the concessions for years, the three
private operators have suddenly found themselves in an
advantageous position now that CAT is seeking their revision.
Whether the concessionaires agree to new terms will depend
on the new terms offered.

14. (U) The NTC clearly has no desire to crush either TOT or
CAT with its fee regime, it is highly unlikely that the NTC
will reduce or waive any charge whereby TOT enjoys special
treatment because it would be so difficult to justify such
decision in public. Thus, while the NTC may reduce the
percentage of fees applied to all licensees so as to lighten
the fee burden, the question of how the issue will be
resolved remains open.

15. (U) For CAT, the impending liberalization of the
international gateway raises the most fundamental question of
all: what will be its source of revenue going forward? CAT
executives claim that the company will generate revenue in
three ways: international calls; data communications and
related services, and CDMA mobile services. Its 2007 target,
for example, is to retain 50 percent of the international
call market and to serve 10 percent of the CDMA market.
Competition is likely to drive long distance revenue down,
however, and the rollout of CDMA has been fraught with
unexpected delays that raise questions about CAT,s ability
to execute.


16. (U) While the mention of SOE privatization generally
carries with it the expectation of success in view of the
many successful share issued privatizations worldwide the
past 25 years, Thailand's state-owned telcos are problematic
as investments. Neither enjoys a monopoly position
comparable to Japan's NTT. The advantages flowing from
incumbency are less evident than in other sectors such as
energy, because of the fast pace of technological change and
the potential disruptiveness of new technologies such as
voice over internet protocol (VOIP). Fixed-line and
long-distance services are yesterday's businesses, under
threat from several directions. The private operators have
the lead in these other segments of the market, such as
mobile and satellite services, and their shares are already
on offer to investors.

17. (U) The RTG,s preference for partial privatization,
where the RTG remains the majority shareholder, is also
problematic. As shown by the American Chamber of Commerce in
Japan Privatization Task Force,s 2004 study of
privatization, such structure of ownership encourages quid
pro quo deals between the government and the former SOE, a
point applying especially evident in the experience of
Japan,s telecom giant NTT.
See: h t t t library/Privatization/PTFgeneral.pdf
The RTG,s own record to date of tinkering with markets by
forcing former SOEs to assist in implementation of policy
suggests that the Thai experience will more likely than not
track that of Japan in this regard (REF D).
18. (U) The most basic question of all is whether either TOT
or CAT has what it takes to compete in the market. The
experience of other partially privatized companies such as
Thai Airways is not encouraging because they have not
produced the results expected. Neither TOT nor CAT has
impressed the Embassy as having made the transition from
being a state-owned enterprise flush with concession revenue
to profit-seeking business. In June, the State Enterprise
and Government Securities Office of the Ministry of Finance
gave TOT and four other SOEs failing grades in its annual
review. The evaluations are carried out by Thai Rating and
Information Services, and are based on factors such as
operational and financial performance, compliance with
government policy, and management efficiency. Securities
analysts have also voiced concerns about the reserve of
engineering talent at the state-owned telcos. Owing to the
private sector's dynamism for the past decade, engineers
wanting a piece of the action have jumped ship, leaving both
TOT and CAT at an obvious technological disadvantage. In
short, in order to succeed with their IPOs, both entities
must overcome the sense that &they have no hope and no core
business,8 in the words of one long-time financial analyst.


19. (U) Industry observers have long considered various
scenarios of consolidation within the Thai telecom market.
One of the most perceptive analysts following the market
favors the Indonesian full duopoly model because it balances
the interests of the public for more and reasonably priced
telecom services with the needs of the telcos for good
margins necessary for them to provide additional services
over the short- and long-term. Such duopoly reduces the
duplication of infrastructure, thereby easing demand for
foreign exchange (as much of the equipment is imported). TOT
and AIS make natural partners, in this view. Such a
combination (in any number of forms) would potentially spark
consolidation among the other industry players. If CAT, TAC,
True Corp (and its mobile operator TA Orange) and the
provincial provider of fixed-line service TT&T merged, the
result would produce a second nation-wide full-service
operator sufficiently large to be a serious competitor to

20. (U) A TOT-CAT merger is highly unlikely. Different
institutional cultures, employee hostility to the prospect,
and an absence of obvious synergies has frustrated
consolidation efforts to date as set out in REF B. Prime
Minister Thaksin Shinawatra himself has pushed the idea, but
it went nowhere and now appears to be dead. Current RTG
policy calls for two separate IPOs.

21. (U) The flurry of interest in foreign tie-ups following
Telenor's buyout of mobile operator TAC in October 2005
introduces new possibilities for alliances and acquisitions.
Singapore Telecom already owns a 20.5 percent stake in AIS,
and is reportedly pursuing other deals, including increasing
its stake in AIS. The NTC reports that several European and
Asian telcos have inquired about investing in Thailand. TT&T
has also announced that it is looking for a foreign partner
to help pay for its rollout of 3G.


22. (U) We think that the RTG will continue to press for the
share-issued privatization of both TOT and CAT in a manner
similar to other privatizations where the RTG has remained
the majority shareholder. The imminent partial privatization
of EGAT may add to the momentum behind both IPOs. Pushing for
privatization has the favorable effect of encouraging
resolution of various regulatory disputes over issues such as
access fees, which will further define the playing field and
expedite unwinding of the concessions. While it is
impossible to predict either the timing or success of either
IPO, we think that TOT has the better chance of launching a
successful IPO on time because it possesses real assets and
has a core business. Should either or both SOEs encounter
difficulty with the IPO process, the RTG would likely resort
to continued delay. Since all plans presently on the table
call for the MOF to remain the majority shareholder, however,
both entities will remain SOEs for the purposes of
negotiating the competition, government procurement, and
investment chapters of the pending Thai-US Free Trade

23. (U) Longer-term, even assuming the successful IPO of
both TOT and CAT, we do not think that either will
necessarily remain independent entities. We think that in
view of the strong pressures encouraging consolidation of the
telecom sector, should either TOT or CAT be able to compete
effectively, it may find itself pursuing a tie-up with
another industry player. Failure on the part of either TOT
or CAT to compete effectively after the concessions unwind,
by contrast, may leave the former SOE with no choice but to
be merged with another company. Since the real measure of
successful privatization as a reform measure is the effect on
the market, even failure (whether at the IPO stage or later)
that leads to industry reorganization would be a success if
it encourages the introduction of new and better
telecommunications services by providing for market
competition and enhanced transparency in the regulatory
environment and investment climate.


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